Tax alert: the IRS has begun audits and these are the signs you need to know
Fortunately, very few American taxpayers actually get audited by the IRS, but here are those that are more likely to get a letter from Uncle Sam.
Every year Americans go through their papers to report their income from the previous year to the IRS and hope that they don’t have to settle any debts with Uncle Sam, or even better if the Treasury will cut them a check. However, for many taxpayers there is always that lingering worry that they will be audited by the IRS, the idea of which sends shivers down American taxpayers backs.
Fortunately, very few actually get audited but there are those who are more likely to get a letter from Uncle Sam informing them that there may be an issue with their tax filing. Here are the people that the IRS are more likely to ask to clarify their tax declaration.
Who will the IRS select for an audit?
The IRS says on its website that “selection for an audit does not always suggest there’s a problem.” It uses different selection methods that could trigger an audit for a taxpayer. One is random selection which is “based solely on a statistical formula.”
Using “norms” that have been developed as part of the National Research Program the IRS conducts, the agency compares your tax return against those of your peers. If something looks to be outside the norm there is a higher possibility that you will be audited.
Another is “related examinations” where a taxpayer’s return involves issues or transactions with another taxpayer who is being audited. Typically, this happens when the IRS is reviewing or examining the tax declaration of a business partner.
Things that increase the likelihood of an audit
You want to avoid errors when preparing your tax return. The IRS provides a list of common mistakes that the agency sees every year that you will want to avoid to ensure your return is processed in a timely manner. But below are the certain groups that have a better chance of being audited.
Claiming excessive deductions
If you are claiming excessive deductions, as mentioned above, you will most likely be outside the “norm” of your peers which could trigger a review and deeper examination of your financial declaration.
This could be especially tempting for the self-employed through over stating the amount of their home that is dedicated to their home office for example. Another common expense that is abused is exaggerating how much you are using your vehicle for business purposes.
Also deducting expenses that are clearly not related to the actual running of the business. The IRS will expect you to have documentation to justify all the deductions you make.
High earners get audited more
According to the IRS between 2013 through 2021 the agency examined 0.44% of individual returns. Although, over that same period, 8.7% of taxpayers who reported income of $10 million or more were audited. However, in more recent years the rate that high earners were audited “dropped precipitously.”
So, in 2023, the IRS said that it would “shift attention to wealthy from working-class taxpayers.” Specifically, those who earn more than $400,000 per year. The agency, using funding from the Inflation Reduction Act, planned to employ “Artificial Intelligence and improved technology to identify sophisticated schemes to avoid taxes.”
Audit rates are high for those who claim the EITC
Refundable tax credits like the Earned Income Tax Credit (EITC) allow taxpayers to get bigger refunds from Uncle Sam, when the credit exceeds what the filer owes in taxes. The EITC though has come under attack for the high rate of audits it triggers for those that claim it.
The credit, which is worth up to $7,830, is designed to assist low- to moderate-income workers, but 82% of audits performed on individual taxpayers with income under $50,000 had claimed the EITC in 2019 reported the Taxpayer Advocate Service. Over 90% of those taxpayer received a correspondence audit but more than a third failed to respond resulting in the IRS disallowing them the EITC.
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